Modern Industrial Economy and Structure of 2008 Financial Crisis

The interdependence of key industries of the economy, have made the participants to realize their inter-reliance of profits, prices, sales, etc. Over time the recognition of such technological and economic interdependence has rapidly changed the meaning and function of stocks, debt, and corporate management structures. The stocks, debt, and boards of directors are part of central planning process and their use as instruments in the planning process rests with exercise of power and coercion over other important economic, social and political organizations. This is because of corporate leaders and their inherent powers to affect the planning process; can change and affect other social, economic and political organizations.

The market system has turned into a large measure, a centrally planned system. And instead of the forces of supply and demand and self interest that leads the important free market outcomes the economic planners in large economy’s units actually coordinate these market outcomes in terms of price, quantity, and resource allocation, from a system wide perspective instead of individuals’ perspective as in case of Adam Smith’s Economy. That is why the inter industry coordination and cooperation within the economy's centrally planned sector bears a closer resemblance to autarchic power than to firm or industry market power.

Veblen’s depiction of modern enterprise is also that companies depend on each other, just like a giant machine, where the processes are very interlinked to each other. Because these companies are very closely interlinked and dependent on each other; the standardization is ensured in a way that irregularity or departure from standard measurements brings fault and thus delay industrial process, it detracts from its ready usability in the nicely adjusted process into which it is to go; and a delay at any point means a more or less far-reaching and intolerable retardation of the comprehensive industrial process at large.  But Veblen does not talk about anything related to central planning in such an interlinked machine process. However, Veblen does talk about the pursuance of profits by the companies and generating high returns but he also warns that it may result in over production in the industry and thus may go against overall socially desirable outcome.

The financial crisis of 2008 are mainly rooted in the banking and financial institutions that are closely linked, while sharing the risk, through instruments like securitization . The interdependence of these institutions not only caused the profit and growth to spread over whole financial system but the risk also spread through securitization. However, corporate leader in financial system have operated in structures that led to an underestimation of risks and excessive risk taking. The regulatory framework overestimated the capacity of banks to manage risk and, as a result, underestimated the level of capital that they should hold. The corporate leadership started influencing the political environment to get bailout plans; and got their support because of attached externalities. The crisis peaked in September/October 2008 when the American authorities decided not to bail out the investment bank Lehman Brothers.